The SEC’s decision follows earlier steps it took toward temporarily restricting naked short selling, a type of short selling where the investor sells shares that he has not yet borrowed, but plans to. The SEC says naked short selling can allow investors to drive down market prices. Any trader who fails to provide the securities by the agreed-upon settlement date is subject to penalties under the new rules. Furthermore, a violation of this rule can lead to a broker being banned from making subsequent short sales.

These are significant steps, but are only part of what is happening. In addition to the actions taken by the regulatory authorities, a move by CalPERS, the California Public Employees’ Retirement System on Thursday highlights the potential effect for institutional investors to curb short sales. Many short sales occur only because institutional investors lend the shares, for a fee, to the short sellers. CalPERS announced it would temporarily cease lending the shares it held in four financial institutions: Goldman Sachs; Morgan Stanley; State Street; and Wachovia. Should institutional investors decide to “call in” the shares they have loaned, then short sellers would be forced to repurchase the shares borrowed in the open market.

The actions taken by both the British and American regulatory authorities, and CalPERS, will significantly impact short sellers and could cause a surge in the prices of stocks formerly restrained by both legal and illegal shorting.